Macro View | James Foster

Independent analysis of Australia's macro indicators

Wednesday, December 12, 2018

In review: Australian Q3 GDP growth slows

Growth in the Australian economic growth was slower than expected in the September quarter as household expenditure decelerated, while private sector investment weakened. 

Output growth on a seasonally-adjusted basis was +0.3% in Q3 — substantially below the market forecast for growth of 0.6% and the softest quarterly outcome in 2 years. Annual growth also slowed by more than expected, easing from a downwardly revised pace of 3.1% to 2.8%, while markets had expected growth of 3.3%. Growth in the domestic economy had been running at an above-trend pace over the first half of 2018 but has now eased to an around trend pace, which is estimated to be 2.75-3% in annual terms.  

This loss of momentum contrasts with the most recent forecasts published by the Reserve Bank of Australia in the November Statement of Monetary Policy for output growth to lift to 3.5% by the end of 2018.

Highlighting the soft tone to Q3's data, growth on a per-capita basis — which adjusts headline growth for population increase — declined by 0.1% in the quarter, slowing the annual pace from 1.5% to 1.2%. 

*Click charts to expand 

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GDP — Q3 | Expenditure: GDP (E) +0.4%q/q, +3.3%Y/Y

Household consumption (+0.3%q/q, +2.5%Y/Y) — The household sector only added modestly to output growth in the quarter (+0.2ppt), as expenditure growth slowed to 0.3%.  There was notable weakness in areas of discretionary spending including vehicles (-1.3%), household goods (-0.3%), and clothing and footwear (-0.2%). Fitting with this trend, growth in expenditure for discretionary-related services (hotels and recreation) was outpaced by the non-discretionary areas encompassing health, education, utilities and insurance. Annual growth in household expenditure eased from 2.9% to 2.5% — the same pace from a year earlier. Over recent years, consumption growth has been volatile from quarter to quarter and that pattern held again with Q3's soft outcome following an upwardly revised 0.9% result in Q2.

Households continue to run against the headwind from weak income growth. Growth in disposable income was 0.3% in the quarter and 2.8% in year-ended terms, however when adjusted for price changes, growth in real terms was flat for the third consecutive quarter and the annual pace eased to just 1.0%. Even after slowing, consumption growth continues to clearly outpace income growth, which resulted in a further fall in the saving ratio to a new post-financial crisis low of 2.4%. Declining property prices and their impact on wealth are a risk to the sector in the quarters ahead.   

Dwelling Investment (+1.0%q/q, +7.1%Y/Y) — New residential construction posted a 0.8% fall in the quarter but was more than offset by a 4.5% rise from alterations and renovations, though this tends to be a volatile component. Residential construction was strong in the first two quarters of 2018 (+3.5% in Q1 and +3.0% in Q2) and while the pipeline of work to be done is elevated, the forward-looking approvals data has weakened sharply over 2018, which points to a slowdown from mid-to-late 2019 onwards.   

Business Investment (-1.9%q/q, -0.8%Y/Y) — Late-cycle weakness relating to the completion of major projects in the nation's LNG sector resulted in new business investment falling for the second consecutive quarter (-0.1% in Q2). This was mostly reflected in engineering — relating to infrastructure work — falling by 8.2% in the quarter (-11.8%Y/Y). Non-residential construction work also contracted by 2.4% in Q3 (-1.2%Y/Y). New business investment has been a drag on overall economic growth over the past year, though the recent Capital Expenditure data for Q3 had indicated that investment is set to rise in the 2018/19 financial year driven by the non-mining sector. 

Public Demand (+1.4%q/q, +4.5%Y/Y) — Public sector demand increased for the 12th consecutive quarter rising by a further 1.4%, while the annual pace lifted to 4.5% from 3.7%. Underlying investment expenditure led in Q3 with a 5.1% rise to be running at 3.5% annually. Consumption expenditure lifted by 0.5% in the quarter to 4.8%Y/Y. Public demand remains a key growth driver in the domestic economy and has added more than 1ppt to activity over the past year. There is further to come with a large pipeline of state government infrastructure projects to work through.  

Net Exports (+0.3ppt in Q3, +0.6ppt Y/Y) — International trade added modestly to economic growth in Q3 and over the past year. Year to date, trade has added a cumulative 1.0ppt to overall growth after being a sizeable drag in 2017 (-1.4ppts). For the quarter, export volumes were near flat (+0.1%) impacted by declines in iron-ore and coal volumes and a large fall in cereals reflecting the impact of drought conditions. Service, however, lifted by a strong 4.5%. Import volumes declined by 1.9% in Q3, reflecting weakness in consumption and capital goods. Looking ahead, drought conditions, which also had an impact on a sizeable drag on inventories (-0.3ppt) in Q3, could weigh on the nation's export performance, though resources will be supportive. 

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GDP — Q3 | Incomes: GDP (I) +0.1%q/q, +2.5%Y/Y

The real GDP income estimate lifted by just 0.1% in Q3, which was below both the expenditure (+0.4%) and production (+0.3%) estimates. In annual terms, GDP (I) slowed from 2.9% to 2.5%  its softest pace in 2 years. 

Nominal GDP growth was 1.0% in Q3 — another solid result after 2.2% in Q1 and 1.1% in Q2. Over the past year, nominal GDP growth was 5.2% and has lifted from the 3.7% pace from 2017. The key factor has been rising prices for key commodity exports, which has driven a boost in national income. This was reflected by the terms of trade rising again in the quarter (+0.8%) and over the year (2.7%), though the true extent can be better highlighted if analysed from the recent trough in Q1 2016. Since then, the nation's terms of trade have surged by more than 20% providing a windfall for the federal government and resources companies.

Corporate profit growth remains strong, rising by 1.7% in the quarter and lifted annual growth from 6.3% to 7.1%. Private non-financial companies, driven by the mining sector, continue to lead the way where profits were up by 2% in the quarter and by 7.5% over the year. For financial companies, profits lifted 1.7% in Q3, though the annual pace was little changed at 5.8%.

Total compensation of employees through wages and salaries lifted by 1% in the quarter, though the annual pace eased back to 4.3% from 4.6%. Over the past couple of years growth in income has been trending higher after weakening to just 1.7%Y/Y at the end of 2016. An increase in hours worked was again the key to this outcome, which lifted by 0.4% in the quarter and by 2.1% for the year, in line with strong employment growth even after a recent easing. 

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GDP — Q3 | Production: GDP (P) +0.3%q/q, +2.5%Y/Y

The outcome for the GDP (P) estimate in Q3 at 0.3% came in between the income and expenditure estimates. Annual growth slowed from 3.0% to 2.5% — in line with the income estimate but well below the expenditure estimate.  

For Q3, declines in output were headlined by agriculture, transport, manufacturing construction and mining. Reflecting the impact of drought conditions, output in the agriculture sector contracted sharply over the past year.

At the other end of the scale, output continues to be led by the healthcare sector in response to strong spending by both households and governments, the latter also driven by the implementation of the national disability insurance scheme. As a result, employment growth in the sector has continued to remain strong.

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GDP — Q3 | Prices

The National Accounts provide the GDP implicit price deflator, which is the broadest measure of economy-wide inflation. According to this measure, price levels increased by 0.8% in the quarter to 2.5% annually, which follows a subdued Q2 (0.2%q/q and 1.9%Y/Y). This has, in part, been influenced by the strengthening in the terms of trade. The Gross National Expenditure deflator, which adjusts for the terms of trade impact, showed a more subdued rise of 0.6% in Q3 and 1.8% annual terms.

The household consumption deflator provides the closest proxy to the Consumer Price Index (CPI) but reflects dynamic changes in spending patterns, unlike the fixed-basket methodology of the CPI. On this basis, prices lifted by a modest 0.3% in the quarter and have lifted gradually over the year by 1.8%. The latest CPI data showed a 0.1% lift in Q3, with the annual pace at 1.9%, indicating that the two measures are now broadly in line.

 — — 

GDP — Q3 | Productivity

Productivity growth remains soft in the domestic economy. In the quarter, GDP per hour worked fell by 0.1%, with total hours worked (+0.4%) increasing faster than output growth (+0.3%). Annual growth in GDP per hour work held steady a very subdued 0.6%. Productivity growth is even softer when analysing the market sector, with GDP per hour worked falling 0.2% in the quarter to remain at 0.4% in annual terms.

There is also little to indicate a change in cost pressures. Nominal non-farm unit labour costs increased by 0.9% in the quarter following a decline of 0.3% in Q2, though the annual pace only lifted slightly to 0.8% from 0.6%. This compares to the recent peak of 2.5% in Q4 last year. Adjusting for inflation, real growth in non-farm unit labour costs was flat in Q3 and declined by -1.5% over the year, decelerating from -1.3% last quarter. Declining real non-farm unit labour costs points to a weakening in labour cost pressures ahead. In the absence of a stronger pick-up in nominal wages growth, real unit labour costs and the broader inflationary pulse will remain soft.

 — — 
GDP — Q3 | States

State demand growth was strongest in New South Wales (NSW) in Q3 at 1.1%, lifting the annual rate to 3.7% from 3.4%. Growth in the quarter was driven by public demand in both expenditure and investment, with the latter to remain a growth driver for the state in coming years led by transport-related infrastructure projects. Private sector investment also had a positive quarter, driven by non-residential construction and equipment expenditure, though the engineering component declined. In the household sector, NSW consumption at 0.2% was a fraction slower than the national result even though the state has the lowest unemployment rate across the nation. Residential construction declined in the quarter ahead of a likely slowing over the next couple of years.

In Victoria, demand in Q3 softened to 0.2% from 1.4%, though the annual rate remains the strongest in the nation despite slowing to 4.3% from 5.0%. The key for the Victorian economy has been a strong upswing in public investment, while the pipeline of work to be done continues to rise. Private sector investment was modest in Q3 as a gain in engineering work was weighed by weakness from non-residential construction and equipment expenditure. Victorian household consumption expanded by 0.5% in the quarter and by 3.3% over the year, though the state has also had the fastest rate of population growth in the nation. New residential construction pulled back 3.3% in the quarter and is likely to follow a broadly similar trend to NSW.

For the other states in Q3, Tasmania led with demand rising by 0.7% (4.1%Y/Y) with residential construction the driving factor. Demand contracted in both Queensland (-0.4%q/q, +2.2%Y/Y) and South Australia (-0.2%q/q, +2.7%Y/Y) weighed by private sector investment. In Western Australia, demand growth was 0.4% in the quarter, but the annual rate turned negative (-0.6%) for the first time since Q2 last year. Private investment has been a drag reflecting the completion of major projects in the resources sector, while household consumption growth remains soft.

Monday, December 10, 2018

Australian property prices fall by 1.5% in Q3

Australian property prices declined by 1.5% in the September quarter according to the ABS' Residential Property Price Index released today. Over the past 12 months, prices on a national weighted-average basis have fallen by 1.9%, which has been driven mostly by the Sydney and Melbourne markets. This series is compiled by the ABS each quarter using data provided by CoreLogic RP Data, who produce more timely updates on a monthly basis. Last week, CoreLogic released their Home Value Index for November (see here).  

Across the capital cities, the results for Q3 were; 

  • Sydney -1.9% (-4.4% in year-ended terms)
  • Melbourne -2.6% (-1.5%)
  • Brisbane +0.6% (+1.7%)
  • Adelaide +0.6% (+2.0%)
  • Perth -0.6% (+0.5%)
  • Hobart +1.3% (+13.0%)  
  • Darwin -0.9% (-4.4%)
  • Canberra +0.5% (+3.7%)

These results are shown in the chart, below.

A granular breakdown of the price changes across the cities for both houses and units are provided in the table, below.

For a historical perspective, the index totals for each capital city are shown in the chart, below, from the start of this series in 2003. According to these data, Sydney prices peaked in the June quarter last year, while Melbourne peaked slightly later in the December quarter. Reflecting these trends in the two largest markets, national property prices according to the weighted-average index numbers peaked in the December quarter last year and have been declining since. However, prices have risen strongly in Hobart and modestly on an overall basis in Brisbane, Adelaide, and Canberra, though the pace of those increases has slowed. 

According to the latest estimates from the ABS, the total value of residential property in Australia eased by around 1% in Q3 to $A6.847tn and the mean price declined by $9,700 to $675,000. Meanwhile, the total number of dwellings increased by 40,900 in the quarter to 10,143,700. 

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As always, when it comes to the Australian property market the analysis on this release from Pete Wargent will be essential reading.   

Sunday, December 9, 2018

Australian housing finance posts its strongest monthly rise in 2 years

The value of Australian housing finance commitments increased by 3% in October in its strongest monthly rise since September 2016. Meanwhile, the number of approvals made to owner-occupiers, excluding re-financing commitments, lifted by its most since July 2017 with a 2.2% increase in the month. This follows very weak outcomes from the past two months, which may, in part, reflect the impact of the application of stricter lending assessments slowing processing times.

Housing Finance — October | By the numbers  

  • The number of lending commitments made to owner-occupiers increased by 2.2% in the month to 52,654, ahead of market expectations for a -0.4% fall (prior month: -1%). Commitments are down by 4.8% through the year (prior: -8.4%)
  • The total value of lending commitments to owner-occupiers (excluding refinancing) and investors increased by 3.0% in October to $A23.773bn to be down by 11.3% in year-ended terms (prior: -4.2%m/m, -13.8%Y/Y)    

Housing Finance — October | The details

In terms of the number of commitments made to owner-occupiers in October (+2.2%m/m, -4.8%Y/Y), loans to purchase established dwellings increased by 2.2%, but have fallen by 3.7% over the past 12-months. 

Construction-related approvals lifted by 2.0% in the month led by loans for construction at 3.2%. Loans to purchase newly constructed dwellings fell by 0.6%. In year-ended terms, construction-related approvals are -10.1%, with loans for construction -5.4% and newly constructed dwellings -19.4%.

The ABS does not provide these details for the investor segment. Click to expand charts, below. 

By value, total commitments to both owner-occupiers (excluding refinancing) and investors increased by 3.0% in October to $A27.773bn. Across the segments in October; owner-occupiers +4.8% to $13.889bn (-4.8%Y/Y), investors +0.6% to $9.884bn (-17.9%Y/Y). These were the strongest monthly rises for owner-occupiers since February 2016 and investors since February 2018.   

Commitments to first home buyers lifted by 15.9% to $3.435bn (+5.3%Y/Y). The value of refinancing increased by 13.9% to $6.652bn (+7.0%Y/Y).  

For the first time since May, there was an increase in average loan sizes for both non-first home buyers (+0.7% to $396,800) and first home buyers (+0.2% to $338,900).

As stated earlier, loans to owner-occupiers nationally lifted by 2.2% in October, or by 1,134 in absolute terms, to 52,654. This result was largely driven by Victoria where owner-occupier commitments increased by 746 (+5.1%m/m) to 15,413 (-6.7%Y/Y), which looks to be mostly attributable to first home buyers (+17.6%m/m) reflecting the impact of state government incentives available to that segment and improved affordability following recent price declines.

Across the other states in October; New South Wales +0.3% (-7.8%Y/Y), Queensland +0.8% (-5.2%Y/Y), South Australia +7.1 (+4.0%Y/Y), Western Australia -0.4% (-7.3%Y/Y) and Tasmania +8.7%m/m (+16.6%Y/Y). First home buyers have contributed heavily towards activity in both South Australia and Tasmania over the past year. 

Housing Finance — October | Insights 

Though a surprising upside result today, it does follow weak outcomes from August and September. Housing finance commitments in both number and value terms remain sharply lower compared to the same point 12-months ago, which reflects the impact of tighter lending standards and also reduced demand with property prices having declined by 4.1%Y/Y on a national basis and by -5.3%Y/Y on a combined capital city basis according to CoreLogic's Home Value Index for November.   

Friday, December 7, 2018

Weekly note (7/12) | Trade optimism fades; Australian GDP slows

Global markets were heavily focused on developments from last weekend's G20 Summit in Buenos Aires in search of signs for an easing in trade tensions. Initially, the signs were taken as positive with a temporary truce reached between the US and China. Under the agreement, US President Trump announced that his plan to raise to raise tariffs on $US200bn of imports from China from 10% to 25% from January 1 would not go ahead. Instead, the two nation's will aim to reach a long-term solution to their differences that mainly relate to trade within 90-days, though if not secured would see tariffs raised to 25%. In return, China announced it will import more US goods, which the US described as "very substantial" quantities of agricultural, energy, industrial and other products. There were several other areas of consensus reached, though these details were the focus for markets.  

The conciliatory nature of the meeting between the President's and the details of the agreement were enough to improve risk sentiment in global equity markets early in the week driving strong rallies in the US, Europe, and Asia. However, the optimism would prove fleeting as reports emerged over confusion regarding the details of the agreement, while President Trump continued to tweet in support of tariffs should the US and China be unable to reach a solution by March next year. These tensions were seen to be escalating following the US arrest of a Chinese technology company executive in Canada.  

Another unsettling development for global markets during the week came from movements in the US yield curve. Yields on 10-year government bonds tumbled to below 2.9% after reaching a 7-year high of 3.23% in early October, resulting in further flattening of the curve. The spread between 5 and 2-year yields turned negative. These moves provided an indication that markets were pricing in a deterioration to the growth outlook in the US over the next few years.

At the end of another highly volatile week, equity markets had fallen by well in excess of 4% in the US and by around 3 to 4% in Europe, while Asian markets declined between 1 to 3%. Australia's benchmark S&P/ASX200 index was, however, able to post a modest rise this week — its first weekly gain in a month. The US 10-year yield fell by a sizeable 14 basis points this week reflecting the impact of concerns around trade and the growth outlook, closing at its lowest level since August.    

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The highlight of the week in Australia was the Q3 National Accounts, which contain the quarterly economic growth figures (see our overview here). Other features on a full calendar were the Reserve Bank of Australia's (RBA) final meeting for 2018 (see our note here), monthly updates on building approvals, retail salesinternational trade, property prices, and a speech from the Deputy Governor of the RBA, Guy Debelle (view here). 

Growth in the domestic economy increased at a slower-than-forecast pace of 0.3% in Q3, which saw growth in year-ended terms decelerate from its above-trend 3.1% pace to an around-trend rate of 2.8%. Markets had expected growth of 0.6% in the quarter and 3.3% for the year. Growth in Q3 was impacted by slowing household spending, declining farm output following drought conditions and a contraction in business investment reflecting the completion of major projects in the LNG sector. 

Most focus was around the result from household consumption, which is the largest share of the domestic economy. Growth in expenditure on goods and services was a soft 0.3% for the quarter and annual growth slowed to 2.5% — the same level from a year earlier. Within this result, weakness in discretionary areas of spending such as new vehicles, household goods and clothing and footwear was noticeable. 

Weak income growth remains the predominant headwind facing households. For the second consecutive quarter, real growth in household disposable income (income less taxes and interest) was flat, while the annual pace has declined over 2018 to just 1.0% from 2.2% at the end of 2017. 

As our chart of the week shows, growth in real household disposable income continues to be clearly outrun by growth in consumption spending. As a result, saving continues to fall reaching a new post-financial crisis low of 2.4% in Q3 with households having to direct more of their income to cover living expenses. In the absence of a lift in income growth, it is highly uncertain for how long this can persist, particularly with property prices continuing to decline in the two major capital cities of Sydney and Melbourne. This points to a likely moderation in the growth of household consumption spending, though the RBA has remained sanguine to this risk by highlighting factors such as strong labour market conditions and official forecasts for above-trend economic growth driven by non-mining business investment, public demand and resources exports. 
Chart of the week

Regarding those forecasts, given the soft growth outcome in Q3 it now appears that the RBA's central expectation for economic growth to reach 3.5% in year-ended terms by the end of 2018 is unlikely as it would require a sharp pick-up in Q4 of around 1.3% — an outcome not seen since 2011 when mining investment was contributing strongly to output growth.

Financial markets reacted to the Q3 GDP data with futures traders reducing pricing for an RBA rate increase over the next 18-months, while the OIS market has started to price in a small chance of a rate cut by around Q3 next year. For the moment, the guidance from the RBA is the expectation for its next move to more than likely be an increase than a decrease, though not in the near term. 

This was a point reiterated by Deputy Governor Debelle in his speech on Thursday. Comments from the speech that gained wide-spread attention were that there was still scope for cash rate reductions and that "quantitive easing is a policy option in Australia, should it be required". The context of the speech was, however, in relation to learnings taken by central banks from measures implemented in response to the global financial crisis, rather than signaling an expectation to follow down that path. 

While the outlook for household consumption is key to Australia's growth outlook, it will likely take more than Q3's soft outcome to change the RBA's assessment of economic conditions. Over recent years, growth in household consumption has been fairly volatile from quarter to quarter, with a general pattern of a soft quarter following a stronger quarter. That trend was again evident in Q3 where the growth outcome of 0.3% came after a 0.9% result in Q2, with that outcome being upwardly revised from the initial estimate of 0.7%.  

Thursday, December 6, 2018

Australia's trade surplus narrows in October

Australia's international trade made a soft start to the December quarter with a strong lift in imports outpacing a more modest increase from exports. Net exports were a key contributor to domestic economic growth in the September quarter.  

International Trade — October | By the numbers 
  • Australia's trade surplus fell by $624m in October to $A2.316bn, compared to the median forecast for a surplus of $3.0bn (Prior rev $2.94bn lowered from $3.017). The 3-month average increased to $A2.518bn from $A2.368bn.  
  • Earnings from goods and services exported increased by 1.3%, or $493m, during the month to $A38.045bn   
  • Total goods and services imported jumped by a stronger 3.2%, or $1.116bn, in October to $A35.729bn

International Trade — October | The details

The trade balance represents the difference between the value of goods and services exported (credits) and the value of goods and services imported (debits) during the month. The fall in Australia's trade balance of $624m is the net result of export earnings rising by $493m and the bill for imports increasing by $1.116bn.

On the exports side, the $493m increase was driven by non-rural goods (+4.3%) reflecting a 12% rise in coal exports. The ABS reported that coal export volumes lifted across the board, which comes after disruptions to shipments recently. The other main contributor was from fuels (4%), reflecting increased LNG export volumes. Moderating those gains, the value of rural goods exported fell by 6.7% in the month with drought conditions impacting the agricultural sector. Non-monetary gold declined by a sharp 23.7%, though volatile movements such as this are not unusual for this component. Services exports lifted for the 7th consecutive month with a 1.1% rise in October. Tourism is the key driver, supported by a lower Australian dollar, and lifted by a further 2% in the month.

For Imports, the increase of $1.116bn to the bill was mostly driven by strong rises from capital goods (+7.8%) and intermediate goods (+5.2%). Capital goods broadly relate to items pertaining to business investment, with machinery and equipment (+6%) and telecommunications equipment (+13%) driving October's rise. The result from intermediate goods reflected a surge of 11% from fuel, with global oil prices in the order of 30% stronger in October than they are at present. Consumption goods lifted modestly by 1%, with a 5% rise in the value of textiles, clothing and footwear imported. Services imports were little changed (-0.3%) in the month. 'Other services' — mostly business services — fell by 1%, likely impacted by a weaker currency.

International Trade — October | Insights 

This was a softer-than-expected start to the quarter, with imports clearly outpacing growth in export earnings, though the 3-month average for the trade balance did lift by around 6% in October. The export performance was impacted by drought conditions and also volatility from non-monetary gold, but there were strong increases in coal and LNG shipments. The rise in imports was much stronger than it had been in recent months and while a weaker Australian dollar and strong oil prices were a factor, it is also likely that volumes lifted. 

Wednesday, December 5, 2018

Australian retail spending up modestly in October

Growth in Australian retail sales lifted modestly in October in line with market expectations. Yesterday's National Accounts for Q3 showed the pace household spending slowed with noticeable weakness in the retail areas.   

Retail Sales — October | By the numbers 

  • Total turnover growth increased by 0.3%, or $92m, in October to $A26.987bn. This matched the market expectation for growth of 0.3% (prior rev +0.1% from +0.2%)
  • Annual growth retail turnover was 3.6%, unchanged from the previous month. 

Retail Sales — October | The details 

Looking across the categories, spending saw a broad-based rise in October, though at a generally soft pace with; food +0.2%, household goods +0.6%, clothing and footwear +2.6%, department stores +0.4% and 'other' +0.5%. Spending within cafes and restaurants fell by 0.9% in the month. 

As a guide to discretionary spending, turnover growth excluding food sales — which alone accounts for around 40% of total retail sales — was slightly stronger than the headline increase at 0.5% in October. Over the past year, sales growth ex-food has risen by 3.3% compared to overall retail sales at 3.6%. 

The state-based data showed some interesting developments. Spending in New South Wales — around 32% of national spending — posted its second consecutive monthly decline at -0.4% in October, which follows a 0.7% fall in September. As a result, annual growth has slowed sharply from 4.3% in August to now 2.1%. This is sure to gain attention given that it is in the capital city — Sydney — where the well-documented declines in national property prices have been most noticed. It is, in all likelihood, too early to identify a clear 'negative-wealth' impact on that basis given the statistical volatility, though it is worth noting that growth in the trend series has also slowed from 3.2%Y/Y in August to 2.9%Y/Y to October. 

Retail spending in Victoria remains robust expanding by 0.6% in October. Annual growth did ease from 6.8% to 6.4%, but this is still vastly ahead of the national rate and remains the state contributing most to retail spending. This has, in part, been helped by strong population growth, but there are also other factors evident such as a low unemployment rate, an upswing in infrastructure investment and comparatively better property market conditions relative to Sydney. 

Outside of the major states, spending in Queensland picked-up by 1.1% (+4.1%Y/Y) and by 0.6% in Western Australia, as annual growth remained positive (+0.6%) for consecutive months for the first time since July-August 2017. Growth was little changed in South Australia and Tasmania at +0.1% in the month. This slowed annual growth in both states; South Australia from 3.6% to 2.4% and Tasmania from 6.2% to 5.7%. 

Growth in online retail continues to rise in Australia, with a 10.5% increase in October to $1.606bn according to the ABS' estimates. Online retail now accounts for 5.9% of total retail sales, up from 5.6% last month and a new record high for this measure. Expect a continuation in November given that this is when 'Black Friday' sales promotions occur. In 2017, online retail spending jumped by 22% in November and by more than 10% in 2016 and 2015. 

Retail Sales — October | Insights

This was a modest outcome from retail spending in October, but yesterday's National Accounts would have had many fearing a downside outcome to the 0.3% expectation. The annual pace at 3.6% remains close to the decade average and the same can be said about discretionary sales excluding food. The state-based data should be watched closely as the developments in New South Wales could be providing an early sign that weak income growth and declining property prices are impacting consumer spending.   

    Tuesday, December 4, 2018

    Australian GDP growth slows in Q3

    Australian economic growth increased at a slower-than-expected pace in the September quarter weighed by private sector investment and inventories. Real GDP growth on a seasonally-adjusted basis was 0.3% in Q3, which was well below the median market forecast for a +0.6% outcome. The annual pace of growth eased from a downwardly revised 3.1% to 2.8%, again disappointing market expectations for growth of 3.3%. Trend growth in Australia's economy is around 2.75-3% in annual terms.

    Q3's National Accounts appear likely to have implications for the Reserve Bank of Australia. Recently in its November Statement on Monetary Policy, the Bank had upgraded its official forecasts for growth in the domestic economy to average 3.5% in annual terms in 2018 and 2019, in part reflecting upward revisions to growth in earlier quarters. So far in 2018, the profile for quarterly GDP growth has been +1.0% (Q1), +0.9% (Q2) and +0.3% (Q3). This implies a required growth figure of 1.3% for the December quarter to see annual growth meeting the 3.5% forecast. The last time quarterly growth was this strong was in Q3 2011.

    The detail of growth in the September quarter was soft. In the key household sector — around 60% of the domestic economy — growth in the consumption of goods and services was a modest 0.3% in Q3, which slowed the annual pace from 2.9% to 2.5%. Weak income growth remains a persistent headwind. Real growth in disposable income was flat in the quarter, as it was in Q2, while the annual rate slowed to just 1% from 1.6%. The impact is that saving continues to reduce, falling a further 0.4ppt in the quarter to a new post-financial crisis low of 2.4%, though there were some sharp upward revisions to the Saving Ratio figures. Property price declines shape as a key risk for households and the broader economy, with potential impacts on consumption and saving.  

    Residential construction added to growth in the quarter (+1%), though the detail was mixed with new construction falling (-0.8%), but offset by renovations (+4.5%). Across the year, activity expanded by a strong 7.1% (construction +5.2% and renovations +11%). However, approvals are weakening, which points to a moderation in activity in 2019. 

    It was a weak quarter for business investment (-1.9%q/q) that was heavily impacted by infrastructure investment falling sharply (-8.2%), reflecting the completion of major projects in the LNG sector. Non-residential construction also declined in Q3 (-2.4%), though the pipeline of work has been rising. More broadly, non-mining investment is likely to drive growth over the next couple of years as indicated in the recent Capital Expenditure data.

    Public demand remains a growth driver of domestic activity led by the investment side. Investment by state governments, particularly in transport-related projects in New South Wales and Victoria, is in an upswing and the pipeline of work to be done is strong.

    Inventories subtracted from growth in the quarter as the 'build' in Q3 at $47m was much reduced compared to the $1.2bn increase in Q2. This partly reflected the impact of drought conditions.

    Economic growth in the quarter was bolstered by a strong contribution from international trade. This was mainly led by services exports, which helped to offset a decline in iron-ore exports. Imports weakened in the quarter, with falls in both consumption and capital goods. 

    More analysis to follow in our Q3 review (see here). 

    RBA concludes 2018 on hold

    At its final meeting for 2018, the Reserve Bank of Australia Board held the cash rate at 1.5% as unanimously expected by markets. The cash rate has been unchanged for 26 consecutive meetings dating back to September 2016. 

    The Governor's statement that was released alongside the decision contained few changes this month. This was perhaps not surprising given that since the Board last met, the RBA has published its latest quarterly Statement on Monetary Policy including their economic forecasts and the Governor addressed the economic outlook in a speech.   

    In today's statement, commentary began by noting that there were indications that the trade tensions currently playing out were resulting in signs of a slowing in global trade activity, rather than being described as a source of uncertainty. 

    Financial conditions still remain expansionary, though it appears the Bank has noted the recent volatility in financial markets stating that "equity prices have declined and credit spreads have moved a little higher".

    The Bank reaffirmed its forecasts as outlined in the Statement on Monetary Policy for economic growth of 3.5% in 2018 and 2019 ahead of a slowing in 2020 from reduced resources exports. Growth is expected to be driven by rising non-mining business investment and an ongoing pipeline of major public infrastructure projects. The outlook for household consumption remains the key uncertainty given the persistence of low income growth, high debt levels, and declining property prices.

    Regarding declining property prices, the Bank kept with the line that "conditions in the Sydney and Melbourne housing markets have continued to ease". However, new in this statement was that "credit conditions for some borrowers are tighter than they have been for some time, with some lenders having a reduced appetite to lend". On the demand side, the Bank continues to note slowing activity from investors, but also now assesses this to be occurring in the owner-occupier segment noting that "growth in credit extended to owner-occupiers has eased to an annualised pace of 5-6 per cent".   

    In line with recent commentary, the Bank maintains a positive outlook for labour market conditions. It notes that the unemployment rate is at a six-year low of 5% and expects a further reduction given its expectation for above-trend economic growth for the next couple of years. However, stronger wages growth is still only expected to occur gradually. Matching with this assessment, inflation forecasts also point to an expected gradual rise in 2019 and 2020.   

    The next RBA Board meeting is scheduled for the 5th February 2019.